September 10, 2003	Wednesday	Rajab 12, 1424

KARACHI, Sept 9: The State Bank seems set to let the cut-off yield on six-month treasury bills improve by 40-50 basis points in the next auction due in the middle of this month.

A source close to the central bank said the need to increase the cut-off yield on six-month paper was obvious — to reinforce earlier SBP signal that T-bills rates had already bottomed out.

“We are expecting 40-50 basis points improvement in the six- month T-bills cut-off,” said treasurer of a local private bank.

Several other senior bankers reached by Dawn said they too were anticipating the same. The last cut-off yield on six-month bills was 1.27 per cent. A 40-50bps increase means it should be somewhere between 1.67-1.77 per cent. “That would not be off the mark,” commented treasurer of another local bank.

A source close to the SBP said it would be premature to say how much improvement would take place in the yield on six-month paper. “But one thing is clear — the SBP needs to reinforce its earlier signal and that is possible only through an improvement in six-month yield,” the banker hastened to add.

On September 3, the SBP raised the three-month and one-year T-bills rates by 31 and 57 basis points, respectively, signalling to banks that the TBs rates have already bottomed out — and that they should now expect an upward adjustment in the same. The main objective was that the banks stop worrying about falling rates on T-bills and should now focus on improving the rates of return on deposits.

The weighted average rate of return on bank deposits fell to a humiliating low of 1.90 per cent at the end of June this year against consumer inflation of 3.3 per cent. This not only prompted the SBP to create an enabling environment for the banks to stop further reduction in deposit rates — rather start improving the same — but also invited criticism by the IMF.

Though the SBP is determined to raise the cut-off yield on six-month T-bills thus reinforcing its signal that T-bills rates are stabilizing, this alone would not immediately result in improvement of deposit rates. “How can banks improve their deposit rates if the banking system continues to remain excessively liquid?” asked head of treasury of a foreign bank.

“In the next auction of T-bills the yields can improve only if the SBP sets a realistic sale target,” he said meaning that if the target is too small increasing the yield to a certain level will be difficult. What makes this point even more important is that the next auction of six-month T-bills will be held in the absence of any matching inflows.

Senior bankers say apart from setting a realistic target for selling six-month bills what else the SBP can do to stabilize interest rates in the inter-bank market is the timely launch of certificates of deposits (CDs). The State Bank has designed CDs exclusively for mopping up excess liquidity from the inter-bank market and is set to launch it anytime. Bankers say the earlier the CDs are launched the better the SBP can reinforce its signal on stabilization of T-bills rates.

MONETARY POLICY: Sources close to the SBP say the stabilization of T-bills rates should not be misinterpreted as any indication of tightening of monetary policy. They say the SBP discount rate is still the anchor of the monetary policy and a shift in the policy would reflect primarily through a change in the discount rate. The discount rate has remained unchanged at 7.5 per cent since middle of November 2002.

The SBP has made it clear in its monetary policy statement in July this year that the current policy is unlikely to be altered between July-December 2003 “unless there is material shift in inflation outlook or exogenous shock.” Neither is in sight for the time being.

DEPOSIT RATE: But the need to improve treasury bills yields stems from the fact the time has come to give a lift to bank deposit rates — and that is not possible without stabilizing the T-bills rates.

BANK PROFITS: Secondly, the T-bills yields need to be raised to keep the banks interest income from falling too low. In the last fiscal year the six-month T-bills weighted average yield recorded a huge fall of 4.63 percentage points causing concern among banks regarding profitability.